When securing your mortgage loan, you might wonder where the lender itself is getting the loan money. While you may think that they are using their own capital for every loan, the reality is that lenders, especially small to mid-sized banks, borrow loans.
Many lenders utilize warehousing loans, or warehouse lending, as a way to provide loans without spending their own money. Warehousing loans are used for providing mortgage loans to customers. Although warehousing loans are used for mortgages from the lender to the borrower, they are not mortgage loans themselves but rather a line of credit for the bank to pull from.
What Are Warehousing Loans?
In order to provide loans to customers, many lenders and other financial institutions rely on warehousing loans, also called a warehouse line of credit. A warehouse line of credit is provided by a warehouse lender to a creditor, i.e. bank. A different, usually larger bank oversees the application and approval process.
When a lender or creditor has a warehouse line of credit approved, they will pay back the bank that approved them, which then pays back the warehouse lender. The lender who has been granted the warehousing loans will then use them for loans to customers, most commonly for houses. As the customer’s mortgage is paid, the lender can pay back their line of credit; this is one of the reasons why lenders like to ensure that borrowers are good candidates with excellent credit histories.
Warehousing loans primarily allow lenders to finance a mortgage loan without having to access their own capital. This type of financing is used until the loan is closed. When the loan closes, the lender typically resells the mortgage to another market investor, which also allows warehousing loans to be a profitable investment for a bank.
Who Are the Warehouse Lenders?
Warehousing loans usually come from specific divisions of large consumer or commercial banks and occasionally mid-sized community banks. Instead of providing traditional mortgage loans directly to consumers, warehouse lenders work directly with clients to provide the short-term funding that is needed for independent mortgage banks (mortgage lenders) to give out mortgage loans.
Although many warehousing lenders are branches of large banks, there are some banks, usually called capital banks, that specialize in warehousing loans as their main form of business. Even if there is just a branch of another bank or a bank that only provides warehousing loans, they are always regulated by state and federal banking regulators, as with all banking financial institutions.
How Do Warehousing Loans Work?
Warehousing loans play an important role in how mortgages reach the everyday customer. Many banks and mortgage lenders rely on them, especially small-to-medium-sized institutions, to help fund their operations. Understanding how they work, however, can be tricky.
For example, when a customer wants to purchase a house, they go to a lender. The bank approves the loan, but instead of using its own capital, the bank borrows the money from a warehousing lender.
Once the bank has the mortgage and it has been financed through the warehousing loan, the mortgage is then held on a warehouse line of credit for a period of time. This period of time is called dwell time and typically lasts between 15 to 30 days, depending on the lender. Once the dwell time has passed, the lending bank can sell the mortgage to other investors, often large institutions such as Fannie or the Federal Housing Administration. If an outstanding loan has been warehoused for too long, the warehousing lender may charge additional fees, called a dwell fee.
In order to obtain a warehousing line of credit, the warehousing lender requires the bank or mortgage lender to provide collateral, such as the bank’s marketable securities, which are financial instruments that can be sold or converted to cash. By providing the collateral, the warehousing lender avoids the risk of having the mortgage lender or bank not pay back the warehousing loan.
It’s important to note that while many mortgages are financed through warehousing loans or a warehouse line of credit, the mortgage loan terms are not affected. The borrower’s payments and other terms will be the same as they were when they closed.
Wet vs. Dry Funding
Just as with personal mortgage loans, warehousing loans can offer wet or dry funding. Wet funding is when all the paperwork that is required to close a real estate transaction is completed at the same time, including the disbursement of funds. Dry funding, on the other hand, is when paperwork is signed before the fund is available for disbursement. Many states don’t allow dry funding to occur on mortgage loans, though.
Warehousing lenders that offer wet funding allow the funds for the loan to be advanced with the loan closed, reviewing the loan documentation after funding. Unlike traditional mortgages, wet funding is the standard and encouraged, this tends to create a higher risk for the warehousing lender. Dry funding with warehousing loans allows the lender to review the loan documents before releasing the funds to the bank.
Why Are Warehousing Loans Important?
Although it may sound strange to have a bank or mortgage lender borrow money to lend out, warehousing lending is a type of commercial asset-based lending that helps small and mid-sized businesses cover cash-flow demands.
Mortgage lenders tend to rely on warehousing loans and lines of credit to preserve their cash reserves; often, a small bank would not be able to meet all the funding requirements for its loans, which means it wouldn’t be able to offer as many loans. The money that is earned from the origination fees and points is often greater than just the interest on a typical mortgage over 30 years. By using warehousing loans, banks are able to increase not only their profitability but their offerings to their customers. This allows small and mid-size banks to grow and compete instead of having the market rely on only a few large banks that could control everything.
Warehousing loans also help ensure the mortgages being loaned out will be repaid to the best of their knowledge. As warehousing lenders oversee the process of their loans carefully, they ensure that the lines of credit that are extended meet high standards and have collateral behind them, allowing them to be lower-risk, high-quality mortgages.
Benefits of Warehousing Loans
Warehousing loans allow small mortgage lenders to access extra cash flow that would be otherwise unavailable and offer several benefits that can impact their customers.
Fast Funding – Warehouse lenders are able to approve loans for banks or mortgage lenders very quickly compared to traditional loans. Lines of credit can often be approved on the same day, depending on the requested amount and the terms of the loan.
Large Loans – If a bank or mortgage lender needs a large amount of funding, warehousing loans or lines of credit are good options. Warehousing lines of credit can be as much as $150 million, depending on the bank and lender. A large loan allows a small bank to provide many mortgages to customers.
Revolving Credit – With a line of credit instead of a traditional loan, banks or mortgage lenders are able to access the warehousing funds as they need, meaning they do not have to pay off the entire loan to use it.
Flexible Funding – Warehousing loans can fund more than just traditional, conventional mortgages. The funding they provide can also go towards reverse mortgages, home construction loans, and even land loans. As warehousing loans are lines of credit, they can be pulled from at any time and used for a variety of different loans.
Warehousing Loans and the Great Recession of 2008
Warehousing loans are commonly associated with the Great Recession of 2008. At the beginning of that year, there were more than 120 companies that specialized in warehouse lending, but at the end of 2009, the number dropped to 10 companies. This caused many financial institutions, like small banks, to file for bankruptcy as they had lost their ability to loan mortgages to consumers, and their overall cash flow was cut. Today, the warehousing lender market has rebounded slightly, providing warehousing loans to many institutions.
Helping Borrowers Reach Their Goals
As home prices surge in today’s market, warehouse lending is an important and critical part of the housing market. It allows small and mid-sized banks to provide a variety of mortgages, often in larger amounts, than they would otherwise not be able to.
Unlike the large banks and warehousing lenders that specialize in warehousing loans, the mortgage lenders are able to focus on the borrower at hand and help make their dream home a reality. The warehousing lenders help to make homeownership possible by providing the liquidity mortgage lenders need.
If you are interested in starting your journey as a home buyer or want to know more about SouthEast Bank’s mortgage offerings, feel free to reach out to one of our knowledgeable lenders, who can answer any of your questions.
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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.